Port Neches Fuels, LLC

UNITED STATES BANKRUPTCY COURT

DISTRICT OF DELAWARE

CRAIG T. GOLDBLATT (ge 824 N, MARKET STREET

JUDGE a Sy a WILMINGTON, DELAWARE

eS oh (302) 252-3832

Te

April 18, 2023

VIA CM/ECF

Re: In re Port Neches Fuels, LLC, No. 22-10500

Dear Counsel:

On February 22, 2023, the Court issued a Memorandum Opinion holding that

certain claims that plaintiffs sought to assert in state court were barred by this

Court’s plan injunction. The Court directed plaintiffs to seek this Court’s approval of

any subsequent amended complaint to ensure compliance with that plan injunction.!

Both sides appealed the order implementing that Memorandum Opinion.

Nevertheless, on March 23, 2023, the plaintiffs submitted their revised, seventh

amended complaint,? which is the subject of this letter ruling. The Supporting

Sponsors argue that this Court is without jurisdiction to rule on the validity of the

amended complaint while the matter is on appeal, but that even if that were not the

case, the Supporting Sponsors maintain that plaintiffs’ amended complaint suffers

from the same defects as their original complaint.? For the reasons described below,

the Court will overrule the Supporting Sponsors’ objection and allow plaintiffs to file

their complaint in state court.

1 TPC Group Inc., No. 22-10493 (CTG), 2023 Bankr. LEXIS 446 (Bankr. D. Del. Feb. 22, 2023).

2 Original Case D.I. 1476. Citations in this letter ruling to “Original Case D.I. _” refer to the debtors’

original bankruptcy case titled In re TPC Group Inc. No. 22-10493. Since the filing of plaintiffs’

amended complaint, that case was closed. Going forward, all matters pertaining to the debtors’

bankruptcy case will be docketed in the case titled Port Neches Fuels, LEC, No. 22-10500. These cases

were all previously jointly administered. To the extent the Court cites to the docket in the Port Neches

case, it will do so as “Surviving Case D.I. _”.

3 Surviving Case D.I. 13.

Page 2 of 11

Factual and Procedural Background

The facts of this case are well known to the parties and thus set out herein only

in brief. The reorganized debtors own and operate a petrochemical business.4 The

plaintiffs allege that they are the victims of an explosion at one of the debtors’ plants

in Port Neches, Texas. Prior to the petition date, several residents of Port Neches

brought suit in Texas state court against, among others, the debtors and their equity

sponsors, seeking to recover damages on account of injuries they allegedly suffered

as a result of the explosions.5 By virtue of the plan of reorganization confirmed by

this Court in the debtors’ bankruptcy, the debtors agreed to release all claims and

causes of action belonging to the estate that the debtors or the estate would have been

entitled to assert against the Supporting Sponsors.6 That release is backed by a plan

injunction that prohibits creditors from asserting any such claim. Plaintiffs, however,

are entitled to pursue their own claims so long as those claims “belong to them, rather

than being estate causes of action. If the claims belong to the estate, then they are

released … and the assertion of such claims is enjoined…”.7

In advance of the February 2023 ruling, plaintiffs submitted to this Court a

proposed sixth amended complaint that they argued complied with the plan’s

injunction.8 But, as the Court explained in its Memorandum Opinion, the complaint

contained claims for veil-piercing that, under Third Circuit law, were claims that

belonged to the estate and were therefore subject to the releases and injunction

contained in the plan. The Court concluded, however, that the complaint also

contained claims for negligent undertaking and other potential tort claims that were

“direct” causes of action belonging to the claimants.9 The Court therefore entered an

order barring plaintiffs from pursuing any claims for veil piercing, and directing

plaintiffs to submit a revised complaint that removed claims that the Court had found

were barred by the injunction. Upon this Court’s approval of the revised complaint,

plaintiffs would be entitled to proceed in state court.

Both sides appealed, but neither party sought an order staying further

proceedings pending appeal. Plaintiffs now seek an order that the filing of the

seventh amended complaint would comply with the plan injunction.

4 TPC Group Inc. and its debtor affiliates are herein referred to as the “reorganized debtors.”

5 Defendants are herein referred to as the “Supporting Sponsors.”

6 Original Case D.I. 1150-2 § 10.7(a).

7 In re TPC Group. Inc., No. 22-10493 (CTG), 2023 Bankr. LEXIS 446 at *11 (Bankr. D. Del. Feb. 22,

2023).

8 Original Case, D.I. 1476.

9 Opinion at 4.

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Jurisdiction

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b).

As a case within the district court’s bankruptcy jurisdiction, it has been referred to

this Court under 28 U.S.C. § 157(a) and the district court’s standing order of

reference.10 As described below, the Court concludes that the appellate divestiture

rule does not strip this court of subject-matter jurisdiction. Because the parties ask

this Court to determine whether the amended complaint complies with this Court’s

injunction, and because this Court plainly has jurisdiction to interpret its own

orders,11 this is a core matter under § 157(b).

Analysis

I. The pending appeal does not deprive this Court of jurisdiction to hear

this case.

The Supporting Sponsors maintain that this Court does not have jurisdiction

to hear this case by virtue of the divestiture rule. That rule, which has been adopted

by the Third Circuit, provides that “an appeal divests the lower court of any further

jurisdiction over the subject of [an] appeal.”12 The purpose of the divestiture rule is

“to avoid the confusion of placing the same matter before two courts at the same time

and preserve the integrity of the appeal process.”13 The contours of the divestiture

rule as applied to a bankruptcy proceeding, however, are less than clear. As one court

explained:

[A] bankruptcy case typically raises a myriad of issues, many totally

unrelated and unconnected with the issues involved in any given appeal.

The application of a broad rule that a bankruptcy court may not consider

any request[s] filed while an appeal is pending has the potential to

severely hamper a bankruptcy court’s ability to administer its cases in

a timely manner.14

The divestiture rule therefore does not, as the Supporting Sponsors argue, stay the

Court from resolving all disputes related to the subject on appeal.15 Rather, “the

10 Amended Standing Order of Reference from the United States District Court for the District of

Delaware, dated Feb. 29, 2012.

11 Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151 (2009).

12 In re Washington Mutual, Inc., 461 B.R. 200, 217 (Bankr. D. Del. 2011).

13 In re New Century TRS Holdings, Inc., No. 07-10416 (KJC), 2012 Bankr. LEXIS 2611 at *6 (Bankr.

D. Del. June 7, 2012) (internal quotations omitted).

14 In re Whispering Pines Estates, Inc., 369 B.R. 752, 758 (1st Cir. BAP 2007).

15 In re Tribune, 472 B.R. 223.

Page 4 of 11

correct statement of the Divestiture Rule is that so long as the lower court is not

altering the appealed order, the lower court retains jurisdiction to enforce it.”16 This

Court, in a bench ruling deciding an earlier dispute arising in this bankruptcy case,

put the point a bit more colloquially:

At bottom, what [the divestiture] rule is about is, it is a directive to trial

courts that they should not play Lucy-and-the-football with the

appellate courts; your decision may not be a moving target. Once it is

on appeal, the trial court should keep its hands off the decision that is

the subject of the appeal. Once Charlie Brown starts to run, the football

needs to stay where it is.17

The Court’s first task is to identify the football. The rulings that are now on

appeal are as follows: First, a claim for veil piercing is property of the estate under

the framework articulated by the Third Circuit in In re Emoral.18 Second, as property

of the estate, these claims were released pursuant to the debtors’ plan of

reorganization and their prosecution is barred by the injunction provided therein.

Third, unlike veil-piercing claims, claims for negligent undertaking and other torts

arising out of the Supporting Sponsors’ independent misconduct are not property of

the estate and therefore not subject to this Court’s injunction.

Under the divestiture rule, the Court is now barred from moving the football:

The Court may not undermine its ruling by now holding that veil-piercing claims are

not property of the estate; that the debtors’ prepetition claims against the Supporting

Sponsors were not released; or that the remaining claims for negligent undertaking

and other intentional torts are now property of the estate under § 541. Had the

seventh amended complaint contained the same defects as the previous complaint,

the Court would not be free to alter its ruling by permitting a claim to go forward that

would have been precluded by the decision now on appeal.

This letter ruling keeps the football in place. The Supporting Sponsors

maintain that “[a]ny substantive analysis of the Seventh Amended Complaint by this

Court would go beyond enforcing the Order,” because the Court “necessarily would be

expanding on the Order while it is on appeal in contravention of the divestiture

16 In re Washington Mutual, 461 B.R. at 217 (explaining that “so long as the lower court is not altering

the appealed order, the lower court retains jurisdiction to enforce it.”); In re NNN 400 Capitol Ctr. 16

LLC, No. 21-816 (CFC), 2022 U.S. Dist. LEXIS 53116 at *23 (same) (citing In re Campanile, No. 17-

24902 (JNP), 2019 Bankr. LEXIS 593 at *2 (Bankr. D.N.J. Feb. 25, 2019) (“Under the divestiture rule,

so long as the lower court is not altering the appealed order, the lower court retains jurisdiction to

enforce it.”)).

17 July 29, 2022 Hr’g Tr. at 179.

18 740 F.3d 875 (3d Cir. 2014).

Page 5 of 11

rule.”19 That is incorrect; all that is prohibited by the divestiture rule is the alteration

of an appealed order. Here, the Court is neither altering nor enlarging its appealed

order – the Court is enforcing it. The crux of the Court’s Opinion – that the sixth

amended complaint contained certain claims that were prohibited by the plan

injunction – is not subject to reconsideration in this Court. Rather, the Court is

determining whether the changes made in the seventh amended complaint cure those

defects. If so, the revised complaint may proceed in state court; if not, it is barred by

this Court’s injunction. Neither of those two outcomes alters in any way the Court’s

reasoning as set out in the Memorandum Opinion.

Defendants also argue that because the sixth and seventh amended complaints

are fundamentally indistinguishable, allowing plaintiffs to file the seventh amended

complaint in state court would be tantamount to allowing the sixth amended

complaint to proceed as well20 – a result that would be inconsistent with this Court’s

prior ruling. But that is a merits question; the defendants’ argument rests on the

presumption that the two amended complaints are identical. To the extent the Court

were to agree with that assertion, the Court would enjoin plaintiffs from filing in state

court. If, on the other hand, the seventh amended complaint is sufficiently different

as to comply with this Court’s injunction, the Court will enforce its previous order

and allow the claims to proceed.

Finally, even if the Court holds that it is not divested of jurisdiction, the

Supporting Sponsors ask this Court to exercise its discretion and refrain from

resolving this dispute. In support of that argument, defendants rely on In re Pursuit

Capital Management, LLC.21 In that case, defendants appealed a sale order, asking

the reviewing court to determine whether a bankruptcy court may, in connection with

a sale order, authorize a chapter 7 trustee to sell and assign its power to prosecute

estate causes of action to a non-fiduciary, and, if such an order is appropriate,

whether it can be done absent an evidentiary showing that the claims are

“colorable.”22

While that case was pending before the Third Circuit, plaintiffs, who had

acquired their causes of action pursuant to the sale order, initiated several adversary

proceedings against the defendants. Defendants moved to dismiss, arguing, among

other things, that plaintiffs lacked standing to bring these claims because only the

chapter 7 trustee was authorized to litigate estate causes of action – the same

argument defendants asked the Third Circuit to consider. Although this question

19 Surviving Case D.I. 13 at 3.

20 Id.

21 No. 14-10610 (LLS), 2017 WL 2537234 (Bankr. D. Del. June 9, 2017).

22 Id. at *8.

Page 6 of 11

was before the Third Circuit for determination, as a matter of straightforward

application of the divestiture rule, Judge Silverstein explained that:

A high level, semi-syllogistic approach to the divestment rule is as

follows: The Sale Order approved the transfer of the causes of action

delineated therein to the Plaintiffs. Relying on the Sale Order, the

Plaintiffs filed the Complaint and the Defendants filed the Motion to

Dismiss. The bases that underlie the Motion to Dismiss are matters on

which I did not rule in the Sale Order so any ruling on the Motion to

Dismiss will not alter or enlarge the Sale Order. . .Therefore, I can rule

on the Standing and Jurisdictional Defenses.23

Regardless, because of the “unique posture” of that case – including the fact

that the defendants placed the issue of standing before two courts by appealing the

sale order and filing their motion to dismiss – the Court held that “[o]n balance, [the

Court] find[s] it prudent not to rule on the Standing and Jurisdictional Defenses prior

to a ruling by the Third Circuit.”24 Informing the court’s decision was the concern

that defendants only sought a ruling on the motion to dismiss in order to provide

them “with optionality on whether to proceed with their appeal” depending on the

resolution of the motions to dismiss.25 Although the divestiture rule did not bar such

gamesmanship, the court decided to exercise its discretion and refrain from deciding

the issue of standing.

Those concerns are not present here. Moreover, other concerns counsel against

holding the matter in abeyance. The parties represented to the Court that the Texas

state court before which the underlying claims are pending has effectively stayed that

litigation in deference to this Court’s authority to enforce the automatic stay and

resolve disputes over the scope of the plan injunction. Having now resolved those

issues (subject, of course, to appellate review), this Court believes that appropriate

respect for the Texas state court counsels in favor of permitting that court to proceed

on claims that this Court has found do not violate the plan injunction.

Relatedly, the Court views the Supporting Sponsor’s request that the Court

defer ruling to be, in effect, an attempt to obtain a stay pending appeal without

meeting the requirements to obtain such a stay. In substance, there can be no

question that this Court’s failure to permit the revised form of complaint to proceed

in state court would operate to stay proceedings in state court for however long the

appellate process may run. But Bankruptcy Rule 8007 and other applicable law set

forth specific requirements and standards that a movant must meet to obtain such a

23 Id. at *10.

24 Id.

25 Id.

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stay. This Court does not believe that it would be appropriate to, in effect, grant that

substantive relief without holding the Supporting Sponsors to their burden of

satisfying those standards. The Court will accordingly turn to the merits.

II. Plaintiffs’ seventh amended complaint does not violate the plan

injunction.

Plaintiffs maintain that they have complied with this Court’s directive by

stripping the seventh amended complaint of all veil-piercing allegations; all that

remains are allegations of the Supporting Sponsors’ independent misconduct. The

Supporting Sponsors disagree. First, defendants argue that plaintiffs failed to

remove Count VIII (now Count VII) from their amended complaint, despite warnings

from this Court that “Count VIII must be dropped and the various assertions about

veil piercing and hiding behind the corporate shield must be stripped out.”26 Second,

the Sponsors contend, more broadly, that the seventh amended complaint fails to

comply with this Court’s Opinion because it is still “littered with veil-piercing

allegations.”27 The Court disagrees with both points.

The Supporting Sponsors ask the Court to enforce its prior decision and strike

Count VII from the seventh amended complaint. In its Opinion, the Court

commented that, in its view, “despite being labeled ‘Direct Liability of the Owners

and Sawgrass Holdings GP LLC,’ [the count] is in substance a claim for veil

piercing.”28 As such, the Court required plaintiffs to remove Count VIII – which is

the previous iteration of Count VII – from the sixth amended complaint. In their

seventh amended complaint, plaintiffs have not removed the count, but instead

sought to amend the substantive allegations to comport with the Court’s ruling.

Count VII, which has the same title as the prior Count VIII, in substance now seeks

to hold defendants liable “in their personal and individual capacities for negligence,

negligent undertaking and direct participation in the events designed to create a

fraudulent depiction of TPC’s value. . .”29 Count VII goes on to describe the extent of

defendants’ operational control over TPC, including an allegation that debtors

required defendants’ approval for certain expenditures.30 Count VII ends with the

allegation that but for defendants’ refusal to authorize certain safety expenditures,

26 In re TPC Group. Inc., 2023 Bankr. LEXIS 446 at *6.

27 Surviving Case D.I. 13 at 7.

28 In re TPC Group. Inc., 2023 Bankr. LEXIS 446 at *7-8.

29 Original Case, D.I. 1476-2 ¶ 129.

30 Id. ¶ 130.

Page 8 of 11

the explosion would never have occurred. Accordingly, plaintiffs seek to hold

defendants liable “for their direct conduct engaged in for their personal benefit. . .”.31

Importantly, plaintiffs have removed the parts of the prior count that the Court

found to be inconsistent with the plan injunction. For example, plaintiffs struck the

portion of Count VIII arguing that “the distinct corporate identity of the corporation—

TPC—will not protect” defendants if “recognizing the distinct corporate identity will

frustrate the ability of injured parties to seek damages,” a hallmark of alter ego

allegations.32 Similarly, plaintiffs removed language from Count VIII urging that

defendants should not be allowed “to hide their independent torts behind the

corporate form of TPC,”33 or “rely upon the [separate] existence of [distinct legal

entities] . . . to escape the imposition of . . . obligations . . . for which they should be

held liable.”34 With these sections removed, all that remains are allegations that

defendants, through their control of the debtors, voluntarily assumed a duty safely to

manage debtors’ affairs, and breached that duty by failing to approve certain safety

precautions. Such claims, although reliant on facts that might also support a claim

for veil piercing (but for the fact that such a claim is enjoined), are not barred by the

plan’s injunction. Accordingly, Count VII may proceed as stated.

Turning to defendants’ broader objection, the crux of defendants’ argument is

that the amended complaint may not proceed in state court because it fails to remove

the “various assertions about veil piercing and hiding behind the corporate shield.”35

Defendants propose an “easy rule of thumb” to determine whether an allegation is a

veil-piercing allegation: “if the allegation is really about actions TPC took at the

alleged instruction of the Supporting Sponsors . . . that is a veil-piercing allegation.”36

Defendants go on to list several allegations included in the amended complaint that

they argue fail this test.37 Because plaintiffs failed to comply with the Court’s prior

decision, defendants maintain that “many of [plaintiffs’] claims against the

31 Id. ¶ 132.

32 Original Case D.I. 1363-2 ¶ 135.

33 Id. ¶ 136.

34 Id. ¶ 137.

35 In re TPC Group. Inc., 2023 Bankr. LEXIS 446 at *6.

36 Surviving Case D.I. 13 at 7.

37 These include the following: “[Defendants] exercised direct, operational control and direction over

TPC through the Board of Managers of Sawgrass Holdings GP LLC;” D.I. 1476-2 ¶ 47; “At all relevant

times, [defendants] owned, operated, directed, controlled, conducted, and participated in the business

and financial affairs of TPC and the TPC plant;” Id. ¶ 112; “In exercising direct, operational control

over TPC’s executive decisions, the Owner-defendants’ voluntary actions imposed a duty to act

reasonable in executing these decisions;” Id. ¶ 57.

Page 9 of 11

Supporting Sponsors remain disguised veil-piercing claims” and are therefore barred

by the debtors’ plan.38

This Court has already rejected the Supporting Sponsors’ position. In its

previous Opinion, the Court noted that it was not persuaded by the Supporting

Sponsors’ argument that a claim for negligent undertaking was really a veil-piercing

claim in disguise because both causes of actions relied on allegations that the

Supporting Sponsors effectively directed the debtors’ operations. As this Court

explained:

The gravamen of the claim for negligent undertaking is that the

Supporting Sponsors played such an active role in directing the day-to-

day affairs of the debtor that they themselves were effectively making

the decisions regarding the company’s safety function. Those same

factual allegations – that the Supporting Sponsors effectively directed

the debtor’s day-to-day operations – are also the basis of their veil-

piercing claim (which, as described above, is actually an estate cause of

action). The factual overlap, however, does not convert the claim for

negligent undertaking into a claim for veil piercing.39

Defendants’ rule of thumb therefore proves too much. Under defendants’ view,

any allegation that the debtors acted under the direction of the Supporting Sponsors

would be disallowed. Such allegations, however, are central to the tort of negligent

undertaking, even if they may also be used to support a claim for veil piercing. It is

also possible that the action of one party in directing the activity of another could

itself gives rise to tort liability for the directing party without regard to the existence,

or not, of any “corporate shield” between the two parties. The task of deciding

whether plaintiffs’ claims fall on one side of the line or another is a surgical one and

therefore cannot be accomplished using an all-or-nothing test. With these points in

mind, the Court can turn to the specific objections raised by defendants.

Defendants’ objection to Count I, a claim for negligence per se, is that

“Plaintiffs merely replaced ‘TPC’ with ‘the Supporting Sponsors,’ which confirms that

plaintiffs are trying to hold the Supporting Sponsors liable for the actions of TPC.”40

In short, Count I of the amended complaint alleges that defendants were subject to,

and failed to comply with, certain state-law regulations. Whether or not the debtors

or the defendants were under any obligation imposed by state law is a merits question

for the state court to resolve. This Court need only decide whether Count I seeks to

38 Surviving Case D.I. 13 at 8.

39 In re TPC Group. Inc., 2023 Bankr. LEXIS 446 at *23-24.

40 Surviving Case D.I. 13 at 9.

Page 10 of 11

hold the Supporting Sponsors liable for their own conduct, or that of the debtors. On

the face of the complaint, it is clear that Count I alleges the former.

Counts II-IV allege claims of negligence, intentional trespass, and nuisance,

respectively. Defendants’ main objection to Counts II-IV is that plaintiffs fail to

provide sufficient information in these counts about the Supporting Sponsors’

independent conduct that would give rise to liability for these alleged torts. While

plaintiffs incorporate preceding factual allegations in each count, defendants

maintain that “such statements and allegations . . . generally refer to the Supporting

Sponsors’ control over TPC, and lack any allegation pertaining to the undertaking of

safety services. . .”41 Both of these points are incorrect. First, in these counts

plaintiffs seek to hold defendants liable for their own alleged misconduct. Second,

although these include allegations that the Supporting Sponsors exerted substantial

control over the debtors, facts that in another context might support a claim for veil

piercing, those same fact may be alleged to show that the Supporting Sponsors’

independent actions give rise to their own tort liability. That is how this Court reads

Counts II – IV. As such, these counts do not violate the plan injunction. Whether

the allegations are sufficient as a matter of Texas law, of course, is a question that is

before the Texas state court rather than this one.

Count V, defendants argue, makes “general assertions regarding control over

TPC and the facility that are divorced from any specific allegation that would support

the Supporting Sponsors’ having made any undertaking to any party in respect of the

facility.”42 But defendants failed to mention that plaintiffs added several paragraphs

to Count V in the seventh amended complaint alleging how defendants:

[v]oluntarily undertook to usurp TPC’s control over safety with respect

to the safeguards, protocols, procedures, personnel, equipment,

inspections, and resources that were readily available to prevent and/or

mitigate the effects of the two uncontrolled TPC plant explosions. . .43

These allegations, as explained above, form the basis for a claim of negligent

undertaking, and are therefore allowed under this Court’s previous decision.

Count VI similarly alleges that defendants’ conduct (alleged elsewhere in the

complaint and incorporated by reference) resulted in the explosion at the debtors’

Port Neches plants and amounted to gross negligence.44 Most of Count VI is devoted

to allegations that defendants owed duties to plaintiffs by virtue of their control over

41Id.

42 Id.

43 Original Case D.I. 1476-2 ¶ 114.

44 Id. ¶¶ 120-127.

In re Port Neches Fuels, LLC

April 18, 2023

Page 11 of 11

the debtors’ maintenance and breached those duties by failing to provide adequate

safety precautions. Such allegations focus on the conduct of the Supporting Sponsors

and therefore comply with this Court’s Opinion.

Count X (the final count brought against all defendants) alleges that

defendants unlawfully withheld information about the conditions that led to the Port

Neches plant explosions and their aftermath.*® The Supporting Sponsors argue that

Count X attempts to hold defendants liable for the debtors’ duty to speak — a veil-

piercing allegation. But Count X alleges that all defendants negligently

misrepresented the circumstances surrounding the Port Neches plant. Whether

defendants had individual duties to warn plaintiffs of the plant’s conditions, and

whether they breached those duties, are of course separate questions of Texas law

that are not before this Court. On the matter that is properly before this Court, it is

sufficient to say that Count X does not, on its face, state a claim for veil piercing.

Conclusion

For the reasons explained above, the Court holds that plaintiffs’ seventh

amended complaint sufficiently removes all allegations of veil piercing. Plaintiffs

may proceed with their complaint in state court.

Sincerely,

Oy JAM MS

Craig T. Goldblatt

United States Bankruptcy Judge

45 Td. J] 165-168.